Interest Rates

• Fixed, variable-rate, and interest-only loan options available
• Fixed-rate bonds sometimes require re-marketing/rate reset after 10 years
• An 18-year minimum term and initial reset period is mandatory for properties with 20% or more Low-Income Housing Tax Credit (LIHTC) units
• Variable-rate bonds typically have the option to convert to fixed-rate bonds, for a minimum 10-year period, or, if less than 10 years, for the remainder of the credit enhancement

Interest Rate Caps: For variable-rate bonds, borrowers must purchase an interest rate cap with a term of at least 5 years. Borrowers must purchase a new cap when the cap expires.

Maximum LTV

• Variable-rate:
• 85% (without the value of tax-exempt financing)
• 80% (including the value of tax-exempt financing)
• Fixed-rate:
• 85% (without the value of tax-exempt financing)
• 80% (including the value of tax-exempt financing)
• 90% (for projects with 90% or more Low-Income Housing Tax Credits (LIHTCs)

Minimum DSCR: 1.00x, as calculated via a variable underwriting rate

Prepayment Penalty: Flexible options available

Recourse: Loans are non-recourse with standard “bad boy” carve-outs

Eligible Properties

• Multifamily Affordable Housing (MAH) Developments
• 4% LIHTC Properties
• 80-20s (deals in which 20% of the property is set aside for low-income residents)
• Bond refunding and new issues allowed

Third-Party Subordinate Debt

Allowed under certain circumstances: hard debt must be issued by a non-profit, public, or quasi-public entity and combined DSCR cannot go below 1.05x, while soft third-party subordinate debt payments cannot exceed 75% of property cash flow "after payment of senior liens and property operating expenses"

Assumability: Fully assumable with lender approval and a 1% fee

Advantages

• Competitive interest rates
• Up to 85% LTV allowance
• Up to 35-year amortization
• 30-day rate locks allowed
• Loans are non-recourse
• Supplemental financing is allowed (up to two supplemental mortgages allowed, with a third allowed under certain circumstances if the loan is assumed by a new borrower)
• No put feature (the bondholder cannot demand that the issuer pay back the bond in advance)
• Forward commitments for new construction available

Disadvantages

• No limits on rate changes
• Borrowers must purchase interest rate cap from an approved provider
• Requires third-party reports including Phase I Environmental Assessment, Property Condition Assessment, and Appraisal
• Issuer and trustee fees required

Case Study: Affordable Housing in Austin

Consider the scenario of Austin Property Developers (APD), a real estate investment and development firm focused on affordable housing in Austin, Texas. APD recently acquired a distressed affordable housing property with plans to rehabilitate it and maintain its affordability status. The acquisition cost and the projected rehabilitation expenses total to about $8 million. To finance this endeavor, APD plans to tap into Fannie Mae's Credit Enhancement of Variable-Rate Tax-Exempt Bonds program.

The project qualifies for this financing program as it's an affordable housing development set for rehabilitation. Furthermore, the firm intends to set aside at least 20% of the property for low-income residents, making it an 80-20 deal.

APD is attracted to the program's LTV allowance of up to 85%. With this allowance, APD could potentially secure funding of up to $6.8 million (85% of $8 million).

The loan terms offered by the Fannie Mae program range from 10 to 30 years, providing APD with the flexibility to choose a term that aligns with their repayment capacity and the projected cash flow from the property. They also appreciate the up to 35-year amortization period, which can reduce the burden of their monthly repayments.

Fixed, variable-rate, and interest-only loan options are available through this program. APD opts for a variable-rate loan due to its initial lower rates, aiming to benefit from potentially falling interest rates in the future. However, they're prepared to purchase an interest rate cap to protect against the risk of rising rates, as required by the program.

APD will need to prepare for certain expenses associated with this program, including the purchase of third-party reports like Phase I Environmental Assessment, Property Condition Assessment, and an Appraisal. Additionally, they'll need to budget for issuer and trustee fees.

Through the Credit Enhancement of Variable-Rate Tax-Exempt Bonds program, APD can successfully secure the necessary financing for their project, contribute to the availability of affordable housing in Austin, and uphold their commitment to community development.

This is a fictional case study provided for illustrative purposes.

In this article:

1. Bond Financing Solutions for the Construction, Acquisition, Rehabilitation, or Refinancing of Affordable Apartment Developments by Fannie Mae
2. Sample Fannie Mae Terms For Credit Enhanced Variable-Rate Tax-Exempt Bonds in 2023
3. Interest Rates
4. Maximum LTV
5. Eligible Properties
6. Third-Party Subordinate Debt
7. Advantages
8. Disadvantages
9. Case Study: Affordable Housing in Austin
10. Get Financing